Everyone knows that not paying their credit card bills will result in expensive finance charges and credit score damage. But the credit card billing and payment process is far more complicated than just that. Not only are there various due dates, timeframes, formulas, rules, and regulations to adhere to, but there’s also that small matter of, you know, having enough money to pay what you charge.
When you combine all of that with the myriad stresses and distractions of everyday life, it’s clear how credit card payments can become confusing or even fall through the cracks at times. But don’t worry, we’ll help clear things up below.
Credit cards are cyclical in nature. Every month, a new bill gets generated, reflecting all of purchases and payments made since the last bill was printed. Payment is generally due 21-25 days after the bill is made available. This process then repeats each month until you close your account.
While a credit card’s billing cycle won’t necessarily run from the first of a given month to the last, your statement will be made available on the same day each cycle and your payment due date will be uniform as well. The Credit CARD Act requires issuers to set due dates that are at least 21 days after their monthly account statements are made available, and they must consider all payments received by 5 p.m. on the due date to be on time. Interestingly, you can also select your own due date, which can be extremely helpful from a cash flow standpoint.
The exact dates that pertain to your particular account can be found on your account statement.
You don’t have to pay your full balance by the due date, but you do have to pay at least the minimum required. Most cards charge a minimum payment of around 3% of your outstanding balance (but your payment typically cannot be less than $10 – $15). Whatever you don’t pay will carry over into the next billing cycle, incurring interest on a daily basis. A payment is considered “late” if it is not received by the due date, but as long as you pay before 30 days have elapsed, it will not be classified as late on your credit reports and therefore will not cause any credit score damage. You will, however, incur interest in the interim since not paying your credit card bill in full causes you to lose your grace period.
There are a variety of ways that you can pay your credit card bill, but they don’t include using another credit card. Issuers, understandably enough, don’t want customers to pay off debts with other debts because that can easily create a vicious, unsustainable cycle that may lead to one bank or another not getting paid – much like a Ponzi scheme.
While the payment options may differ depending on the issuer, the most common methods are:
- Cash (if your credit card company also has a local bank branch)
- ACH (by providing your bank account and routing numbers on your credit card company’s website or over the phone)
- Online Bill Pay (typically an option with checking accounts, but more and more prepaid cards are offering this feature as well)
- Money Transfer (e.g. Western Union)
You can also set up automatic monthly payments from a bank account so you don’t have to worry about remembering to pay each month. That’s probably the best way to pay your credit card bill.
Depending on your payment method and the time of day you submit a payment, it will be credited (i.e. marked as received) and posted (i.e. listed as a transaction on your statement) either the same day the bank receives it or the day after. The law holds that payments received by 5 p.m. must be credited that same day, and many issuers have even extended the timeframe by a few hours.
Some people pay their credit card bills whenever it occurs to them, which often results in a payment being received well before the due date. Others pay multiple times each month because they have a low credit line or are trying to manage cash flow. Still others pay more than they’re required to in a given month because they think the excess funds will be put toward the next month’s minimum payment if they can’t come up with the cash at that time.
But are those wise strategies? We will answer that question in detail below.
Paying Early: Paying your credit card bill early is perfectly acceptable. As long as your payment is for at least the minimum required, then you’re good to go. Your payment will be considered on time and your account will remain in good standing (or won’t become more delinquent).
Submitting early payments can actually be a smart strategy for indebted credit card users. Interest is calculated on a daily basis, after all, and an early payment will reduce the balance that is susceptible to finance charges. If you don’t carry a balance from month to month, this strategy wouldn’t do anything for you and may even cost you some money – credit card interest won’t be accruing daily, but you’ll be sacrificing the ability to earn interest on the money in your bank account.
While some folks believe that paying credit card bills many days in advance of the due date will benefit their credit scores, that is just a myth. As long as you pay at least the minimum amount required by your monthly due date, the impact on your credit standing will be no different if you pay that very day or in advance. With that said, individual financial institutions use proprietary underwriting methods, and the more sophisticated issuers may be able to isolate early payments. If such payments have a correlation to overall payment responsibility in the issuer’s algorithms, you may see your account terms improve as a result. That, however, is just conjecture and should not be counted upon.
Paying More Than the Minimum: While you should always strive to pay your full account balance each month, doing so isn’t always possible. In such cases, paying as much as you can above the minimum required is essential, as it will minimize the balance on which interest accrues. Keep in mind, however, that payments above the minimum will not be credited to the following month. Obviously, if you have zero balance or a negative balance at the end of the billing period, there will be no payments required the following month. In fact, creditors are required to mail you a check if you maintain a negative balance for long enough.
Paying Multiple Times Per Month: There is nothing wrong with paying your credit card bill more than once a month. Doing so can help you regain spending power if you’re close to your spending limit or get out of debt faster while incurring less interest.
The implications associated with paying your credit card bill late depend on just how late we’re talking as well as whether or not you have a revolving balance (i.e. a balance carried from month to month).
If you always pay your balance in full, you’ll have a grace period that allows you to use your card interest-free. By submitting a payment after the due date, you will lose your grace period and interest will accrue on a daily basis until you pay two consecutive bills in full, allowing you to regain the grace period.
If you have a revolving balance, you will incur interest until you pay what you owe in full, regardless of whether you submit a payment by the due date or not. However, paying late will trigger late fees as well as credit score damage, depending on how many days late the payment is.
If you are less than 30 days late on a credit card payment, fees and interest will accrue but your credit reports will not reflect a late payment. If you’re more than 30 days late, the card’s issuer will report that fact to the major credit bureaus, which will mark you as “not paid” for that month. The farther behind you fall on a credit card payment, the more delinquent you will become and the more credit score damage you will incur. If you become 180 days late, your account will be in default and the credit score damage will be extensive.
In order to bring your account back to good standing (assuming you have not defaulted), you must pay at least the number of minimum payments you have missed, plus the minimum payment for the current billing cycle.
There are a few rules of thumb that you can live by in order to: 1) never miss a credit card payment; and 2) ensure that you aren’t spending beyond your means. They include:
- Review Your Account Statements: No one wants to pay for a credit card company’s mistakes or unauthorized purchases resulting from fraud. Regularly reviewing your account statements for errors is the best way to avoid doing so.
- Make Your Due Date Suit Your Cash Flow: In order to pay your credit card bill on time, you must know when your due date is. If that particular day does not promote healthy cash flow (e.g. your payment is due on the 14th and you get paid on the 15th), ask your issuer to change your due date.
- Set Up Automatic Monthly Payments: You can take forgetfulness out of the equation by establishing monthly transfers from your bank account to your credit card issuer. You simply need to make sure that you have sufficient funds in your bank account.
- Budget: Too many people use plastic without a defined plan. In order to spend within your means, you need to determine how much you can afford to spend each month and on what. You also need to keep this budget in mind throughout the month and compare your ultimate buying habits to this budget on a regular basis.
- Use a Credit Card Calculator: If you’re planning a big-ticket purchase, a credit card calculator will enable you to determine how long it will take to pay off this expense in light of a fixed monthly budget, or, conversely, how much you’ll need to pay each month to be debt free by a certain time. Such a tool therefore allows you to evaluate whether or not a given purchase is worth the expense as well as how much the cost will grow over time due to interest.
- Employ the Island Approach: The Island Approach is a credit card management strategy that, in its most basic sense, entails separating revolving debt from ongoing purchases. Not only will this lower the average daily balance on your debt account, but it will also make it easier to determine if you’re overspending on a regular basis. You should be able to pay for standard monthly expenses like gas and groceries in full every month, so the presence of interest on your everyday spending account will signal the need to curtail your spending.
The credit card billing cycle can be confusing for anyone, but as long as you remember three basic rules, you’ll be fine. First, only payments that are more than 30 days late are classified as late on your credit reports, so missing a payment by a few days shouldn’t be a source of stress. Second, interest accrues on a daily basis when you don’t pay your bill in full and on time every month. Paying as much as you can as early as you can is therefore essential to minimizing finance charges. Third and finally, budgeting is the best way to avoid overspending and being surprised by your credit card bill, so make one and stick to it.
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